Friday, March 14, 2014

A Look at Intermediate-Term Market Strength

Here's a measure that has done a nice job for me of tracking intermediate-term market strength and weakness. You can see that we topped ahead of price, which is common, and have rolled over. We have not, however, reached oversold levels, despite yesterday's stiff decline. Those oversold occasions have marked very good buying opportunities in the past several years.The intermediate strength measure looks at the number of S&P 500 stocks making fresh 5, 20, and 100-day new highs and lows and takes a moving average of that composite. The data come from the Index Indicators site.Like the crossovers, I've tracked these measures for years. Daily posting of numbers and testing of relationships provides a learning experience that, for me, is far deeper than anything I can get from staring at screens.Further Reading: Implicit Learning and Trading Performance

I've found that the number of signals that a system produces is an important component that will dictate how well it can be combined with implicit learning. Systems that generate fewer signals are relatively more difficult to improve through implicit learning. There is a "high opportunity cost" in attempting to improve these sorts of systems. Improvement is thus primarily through objective insight, repeated experimentation, and analysis. This sort of approach to the market, however, is not implicit but largely declarative and rational benefiting from moments of insight.

Systems that produce a great number of signals can, however be quite beneficial for the process based intuitive trader.

For, example I use a process-based approach to reading the market. I read the tape using my specialized order flow software (OrderFlowDashPro's AlphaReveal). I can get a good read on the order flow and order book. And, just relying on my process-based approach, I'd typically find a few good opportunities per day. However, I've recently combined this with proprietary graybox systems which can produce upwards of 30 trades per day. I find that watching these bots while reading the tape to be extremely valuable. For example, today when bot triggered a sell, a huge order was executed at the exact same moment. The combined knowledge from the tape and the bot provided critical insight into what the market was likely to do and importantly into the market's current regime -- and that metacognitive insight that is something that both trading systems and declarative insight struggle with.

It reminds me, a trader who is bored or impatient, may not be operating on the market in a way that best suites their psychology. Contrary to what one might suspect, a trader struggling with impatience or boredom may well do better if encouraged to take even more trades then usual.

PART 1; Hello Brett, the link at the bottom of the page, “implicit learning and trading performance” has some great information and additional links that are a must read. I love sports illustration of how a quarterback may have a game plan, but must look at or feel other stimuli (like a rush from the D line) and reassess the play at that moment. Then you relate the discretionary traders that scalped the market, but could not articulate in an explicit fashion how they were making their decisions, yet it was obvious by their track records that it was not luck. The conclusion you drew was that in the world of pattern recognition, the brains works well in a subconscious mode. An interesting example you spoke about was driving a car, and reacting to a pattern that could lead to danger. While correcting your course to avoid it was accomplished, it was done in a manner that did not require that decision to be articulated, before the action was taken. I see my cats react in a similar manner. They have lots of patterns in their brains. Sounds of the food bag, sounds of their name being called, verbal tones that they relate to, but one in particular, if you create a new sound that they may not relate to right behind them, they take off, and don’t look back until a distance has been created between that new unfamiliar sound and when they look back to analyze the situation. They never look back first, and then decide whether to run or not. You might say that they have internalized patterns that are not a danger to themselves, but can still act on patterns that they are not familiar with in a subconscious mode (using that term in a relative fashion). I love the paragraph that speaks about the obstacles that can prevent one from using implicit information in an explicit fashion, things like, fatigue, worry, frustration etc.

PART 2: How many times have we heard the cliché’, you just have to try harder! I used to do just the opposite. If I was working on a difficult equation in excel that I could not find the answer to, I didn’t work harder, and I stepped away, and rested. I thought about the challenge away from the desk, and sure enough, like an epiphany, was able to get into the zone and worked toward the solution. I didn’t need more information per say, just a different approach that came from my previous experience having worked with excel in the past and drawing on my gut as to the approach allowing a faster iteration. Paradoxically the equation went from a seeming simple array formula with a few directives like “match”, “if”, etc; to a 5000 character expression that you would have thought would have slowed the iteration time down, but it did not. Looking back at that experience, I think that was an interesting example of how I used my past experience (pattern recognition you might say in the context of my experience using excel in the past) and used that in a novel way that gave me the results I needed. Could I explain how I was going to fix the problem before hand? NO. Did I study more information on using excel? NO; but my the end of the matter, I was in the ZONE, and programmed a 5000 character string that worked better than any other equation that did work, but just not at the speed I wanted. Was that drawing on implicit experience? I would say YES.That was an interesting article that you link to entitled “our unconscious brain makes the best decisions possible” Thanks for that link where Pouget posits some interesting things regarding “probability distributions”, and “probabilistic decision making”.The second article in that series of posts entitled “Implicit learning, self-regulation and Biofeedback; Training for trading performance” is also fantastic! You mention that success is not just the acquisition of information, but rather the ability to internalize them over time. I would add also, over time, you acquire the ability to synthesize also. Additionally you mention that the majority of traders fail because of insufficient exposure to market patterns, lacking the ability to facilitate the internalization of such patterns. I would add, considering all the different types of markets, trends ups, trends down, rotating, high volatility, low volatility, etc. Over the years, how many exposures does any trader get how the market acts when it hits a 200 day moving average? Not many…Time and exposure is necessary for such occurrences.The third point, I love this one,,, just buy a book or spend a few thousand and I will teach you how to trade! Enough said about that, been there done that! If there is one positive that comes out of that scenario, if you survive, is that you know you must look to something different, in my case if was finding Don Jones and you Doc! Interesting all the best information was free! Thank you and others for that!Regarding your forth point where you speak about “training programs that are not structured on a way that is designed to maximize implicit learning” , I remember back in the early days of my process with TAMTA, I used to create the trading day in a simple format simply to get my brain wrapped around how the market moved. That was it; I just wanted to see the way the market moved from day to day. I used to replay the day, within a market profile constructed format, with big bold letters representing 30 minutes periods, replaying the day within about 15 minutes, watching the rotations, up, down, sideways, etc. I did that for a few months. I believe that was an interesting exercise in implicit pattern recognition. I believe those Youtube video links are still in the archives.Of course your fifth point regarding stasis, is so KEY, that being the ability to draw on that body of implicit information. Biofeedback, breathing, etc, are too, so important as is being free of distractions, in a world of challenging conditions and uncertainty.Thanks for the stimulating articles, Best, SSK

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).